Should mega projects be deferred?

Ranjit Singh

THE Covid-19 outbreak has posed unprecedented challenges not only on the health front but also to the country’s economic condition. It is a fair question to ask at this juncture whether the government should put on hold some of its mega projects to provide more resources to combat the pandemic.

Malaysia’s budget deficit which stood at 6.7% at the end of the Global Financial Crisis of 2009 has been significantly reduced to 3.4% at the end of 2019. However, the government has cautioned that the deficit would spike this year due to the additional funds that it had set aside to fight Covid-19.

Prime Minister Tan Sri Muhyiddin Yassin unveiled a RM250 bil ‘Prihatin Stimulus Package’ to mitigate the economic impact of the outbreak. Additionally, he also outlined a RM10 bil aid package for SMEs affected by the Covid-19 pandemic.

The government did not provide details on how it was going to finance the stimulus package but it was obvious that the deficit would increase. Some economists have forecast that the deficit may leap to 6% in 2020.

Muhyiddin had also said that the mega projects that the government had committed to earlier such as the Mass Rapid Transit (MRT 2), Light Rail Transit (LRT 3) and the East Coast Rail Link (ECRL) would be continued.

The total cumulative cost of all these projects is around RM88 bil. However, these will be spread out over a few years and the impact would be less on a yearly basis.

For the ECRL project, which has been awarded to a China company, it was expected that there would be a large presence of China workers which may not take place for now. Also, there are likely to be delays due to the lockdown as well as worker shortage which is likely to mean slower completion for at least this year.

The government should consider deferring these projects to lessen its financial stress and prevent the deficit from going out of hand. International rating agencies have cautioned Malaysia in the past that failure to bring its deficit in check may result in a downgrade and that would see Malaysia’s borrowing cost escalate.

However, the flip side of the argument is that these projects have great linkages to the economy. It has been estimated that the mega projects have the potential of contributing 1% to GDP growth in 2020. Given Bank Negara’s projection of GDP growth between -2% to 0.5% for 2020, the deferment of these projects would have a telling effect on economic growth.

The Malaysian Institute of Economic Research (MIER) in an earlier report had said that an estimated 2.4 million people would lose their jobs due to the Covid-19 outbreak. This represents 15.8% of the nation’s workforce.

Besides having a high multiplier effect on the economy, these mega projects also employ thousands of people, and the postponement of these mega projects would result in massive job losses.

The government is caught in a tough situation to decide between deferring these projects or to proceed with the financial consequences. Another factor to consider is that the infrastructure spending is expected to provide a boost to construction stocks that have been in the doldrums for a long time.

But if it is a choice between shortage of funds for the B40 group which may be desperate for it, and going ahead with these projects when the need elsewhere is greater, the government should decide against the mega projects.

The shorter-term, more pressing requirements should be sorted out first rather than longer-term projects with long gestation periods and limited benefits when the economy may be on downturn for a long time.

Thus there may be a strong case for deferring capital-intensive projects which will offer little benefits now in favour of, for instance, direct cash injections into the economy by handing out cash to those who badly need them to put food on the table.

Also, more money should be diverted to judicious subsidies and prudent cheap funding for businesses to sustain themselves through this difficult period which in the long term will save jobs, keep incomes flowing and result in a sustained demand for products and services.

Such measures will have more benefit than investing in long-term capital-intensive projects right now, which should only be resumed post the crisis now caused by the Covid-19 pandemic. – April 10, 2020

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